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Paul Krugman Is Right About Differences

February 4, 2009

by Mario Rizzo

Paul Krugman is right. David Broader recently said that we need “the best ideas from both parties.” We could of course interpret this trivially. I too want the best ideas to predominate. But Krugman sees an important point:

You see, this isn’t a brainstorming session — it’s a collision of fundamentally incompatible world views. If one thing is clear from the stimulus debate, it’s that the two parties have utterly different economic doctrines. Democrats believe in something more or less like standard textbook macroeconomics; Republicans believe in a doctrine under which tax cuts are the universal elixir, and government spending is almost always bad.

Obama may be able to get a few Republican Senators to go along with his plan; or he can get a lot of Republican votes by, in effect, becoming a Republican. There is no middle ground.

While I do object to the idea that opposition to spending stimulus is characterized by the idea that “tax cuts are the universal elixir,” I do think that the pro-spending crowd is adhering to textbook simplicities (my term). I would hate to have an even-excellent intermediate macroeconomics student in charge of the stimulus package. He is not smart enough and neither are those who are acting as if they were such students. The fundamental problem is that what is passing for stimulus is a vast scheme to prevent the reallocation of resources created by the previous bubbles and other bad policies.

3 Responses to “Paul Krugman Is Right About Differences”

Very good points. Before the post-WW II birth of Keynesian macroeconomics texts, more economists probably understood the unintended results of credit bubbles and their role in the business cycle. Correct me if I’m mistaken, but it seems that this has been lost on the economics profession, except for a band of Austrians.
Missing from the discussion (except for Austrian commentary) is, following your last sentence, an understanding of the microeconomic foundations, transmission “mechanisms” (sorry), and feedback loops that make up macroeconomics. Other than that, Mrs. Lincoln, how was your macro course?

I have yet to see a coherent discussion by Krugman or any other Keynesian of what caused either the boom or the bust.
They seem absolutely oblivious to the economic consequences of what The Economist recently called the biggest credit bubble in history.

True story: when I was an undergrad, my monetary theory prof, a dyed-in-wool Keynesian, who later became a mucky muck at the IMF (and who was an excellent teacher), told me in his office that he didn’t believe in microeconomics. I didn’t want to rock the boat and jeopardize my grade, so I didn’t tell him that I thought his comment was nonsense.
But, hey, if you’ve got Y = C + I + G, who needs micro, especially if the economy is in the doldrums and the War Party, I mean the Party of Keynes, has the votes?

So the Democrats believe that an enourmous credit induced boom and bust should be remedied by more debt, achieved by a vast increase in government expenditure, even though output is contracting.

The Republicans believe the same, except that the increase in debt should be acheived by cutting government revenue and holding spending roughly constant.

So what do the scientists think? Are they telling us that we’ve been living beyond our means and that some constraint would be appropriate? Oh no, that would be as if life was some sort of “morality play”!

The reign of Bush II demonstrated the eternal truth of one proposition – both tax cuts and government spending are popular. This calls into serious question the ability of a democracy to make rational decisions.

We should pay more attention to Kenneth Arrow’s impossibility theorem, that any decision concerning the general welfare involves some dictatorship.

Spinoza argued that rational men seeking their own selfinterst will naturally act together for the common good. This is the central Stoic doctrine that became Adam Smith’s invisible hand.

We must recognize that this doctrine is not true. and this calls into serious question the foundations of both capitalism and democracy.